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Latin American air travel has soared recently on the wings of an expanding middle class and a boom in business. According to the International Air Transport Association, the region is the fastest-growing airline market in the world, with passenger-demand growth of 10.2% last year, more than double North America's 4.0%.

Panama's Copa Holdings has extended its reach dramatically under CEO Pedro Heilbron and now operates 290 daily flights to 28 countries. The company has close marketing ties with Continental Airlines.
Copa Airlines

Today's modernized, slimmed-down carriers bear little resemblance to their bloated, state-controlled forebears, such as Varig of Brazil, AeroPeru, and Mexicana. Flying the national flag was a higher priority than turning a profit for the older generation, and most of the older airlines eventually went bankrupt. The upstarts are putting profitability first and benefiting from rising fees, shrinking capacity, relatively new fleets of fuel-efficient aircraft, and low legacy costs, says Michael Linenberg, an analyst at Deutsche Bank in New York.

Consider the recent stream of good news from Panama City-based Copa, which has close marketing and code-sharing ties with Continental Airlines. (Continental, now part of
United Continental Holdingsual -0.7916959887403238%United Continental Holdings Inc.U.S.: NYSEUSD56.39
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8.172463768115943Market Cap
21301998577.721
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457119More quote details and news »ualinYour ValueYour ChangeShort position
(UAL), once owned 49% of the carrier.) Copa reported a 28.6% increase in earnings last year, to $310.4 million, or $6.98 a share, on a near-30% jump in revenue, to $1.83 million. Passenger traffic was up 22% this year through February. Particularly impressive, says Linenberg, are Copa's consistently fat operating margins of 17% or higher. "Operating margins are a key metric because you can have a high load factor and be giving away your seats, or charging high fares but not filling your airplanes," he says.

Copa offers 290 daily flights to 59 destinations in 28 countries, and has expanded greatly in recent years under the leadership of CEO Pedro Heilbron. It specializes in flying business travelers to small and mid-size cities, such as Guadalajara, in Mexico, and Manaus and Porto Alegre, in Brazil.

Copa went public in 2005 at $20 a share, and now trades for $74. Linenberg has a 12-month price target of $80, but that's conservative compared with Morgan Stanley's $91. The carrier is expected to earn $7.50 a share this year and $8.40 next, and trades for nine times 2013 profit estimates.

Analysts also like the prospects for Latam Airlines, which will be formed by the merger of LAN and TAM. Right out of the gate, the new company will be the world's largest airline, with a market value of $13.5 billion. Analysts are skittish about projecting earnings for Latam, given several delays in the merger, but the combined company eventually could see robust growth as a result of its well-positioned air-cargo business, an expanded passenger network, a strong frequent-flyer program and rising passenger demand in Brazil.

LAN acquired Aires, Colombia's second-largest airline, in 2010, and has been giving Avianca, Colombia's No. 1 carrier, a run for its money on its home turf. Merger synergies already have paid off for parent AviancaTaca (PFAVTA.Colombia), born of the 2009 merger of Colombia's Avianca, a bankruptcy-filing survivor, and El Salvador's Taca. AviancaTaca's profit more than tripled last year, to $109 million, on revenue of $3.8 billion, up 24.6%.

Passenger traffic has risen 40% in the past two years, aided by added flight frequencies and destinations made feasible by the merger, CEO Fabio Villegas said in a recent interview. "There has been a tremendous flow of investment into Colombia and Latin America in recent years, and that translates into a rising flow of passengers," Villegas said. "Now, Latin countries are much more interconnected."

The Bottom Line

Copa, Gol and Latam Airlines, to be formed by the planned merger of LAN and TAM, could see their shares climb higher in the next year. AviancaTaca also has promising prospects.

The Colombia-listed shares of AviancaTaca have had a choppy 12 months despite the company's healthy operating performance. They have rallied 24% this year, to 4,100 Colombian pesos (about $2.33), but are down 30% from their 12-month high.

AMONG THE LATIN CARRIERS, Gol has been the weakest performer. Shares have fallen to $8 from a 52-week high of $14 as the company has struggled with higher fuel costs, fierce domestic competition and its 2007 acquisition of Varig. Linenberg sees a "turnaround story" in São Paulo-based Gol, noting that per-capita flights average 0.2 a year in Brazil, about where the U.S. was in the 1950s.
Delta Air Lines dal 0.7040654099477629%Delta Air Lines Inc.U.S.: NYSEUSD44.34
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31.67142857142857Market Cap
35267947896.0263
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1.2178619756427604% Rev. per Employee
513125More quote details and news »dalinYour ValueYour ChangeShort position
(DAL) apparently likes the market's growth potential, too. It bought a 3% stake in Gol in December and got a seat on the board.

Can Latin America's airlines fly right now and avoid their past mistakes? "Brazil has gone seven or eight years without a crisis," says Morgan Stanley analyst Nicolai Sebrell. "With that amount of stability, people can plan on a sustained future."

That future is apt to involve a lot more airline travel.

Buckle Up

Shares of most Latin carriers have lifted off, though they still are cheap relative to the global airline group. The companies below also pay decent dividends.